If you’re one of the millions receiving Social Security Disability Insurance (SSDI) benefits, it’s important to understand the financial implications that come with it, especially when it comes to taxes. While SSDI benefits are federally protected, many people don’t realize that their state may impose taxes on these benefits. This week, if you are receiving SSDI benefits, you may find yourself owing state taxes. This article breaks down the key things you need to know to stay informed and avoid surprises when tax season comes around.
What Are SSDI Benefits?
Social Security Disability Insurance (SSDI) is a program that provides benefits to individuals who are unable to work due to a disability. The benefits are administered by the Social Security Administration (SSA) and are designed to replace a portion of a worker’s income. Eligibility for SSDI benefits is based on both a person’s work history and the severity of their disability.
However, while SSDI benefits are crucial for those unable to work, they are not necessarily tax-exempt. Understanding how taxes apply to SSDI benefits can help individuals avoid unexpected tax burdens.
Are SSDI Benefits Taxable?
At the federal level, SSDI benefits are not automatically tax-free. Whether or not you owe taxes on your SSDI benefits depends on your overall income. The Social Security Administration (SSA) defines the income that counts toward determining if your SSDI benefits are taxable.
According to the SSA, your SSDI benefits are taxable if your “combined income” exceeds a certain threshold. Combined income is calculated as your adjusted gross income (AGI), plus any non-taxable interest, and half of your SSDI benefits.
Federal Taxation:
- If you are single and your combined income is more than $25,000, you could pay federal taxes on up to 50% of your SSDI benefits.
- If your combined income is over $34,000, you could pay taxes on up to 85% of your benefits.
- For married couples filing jointly, the thresholds are $32,000 for 50% taxation and $44,000 for 85% taxation.
What About State Taxes?
While the federal government taxes SSDI benefits under certain conditions, state tax laws vary. Some states exempt SSDI benefits entirely, while others may tax a portion of these benefits based on your income level. The following states are known for taxing SSDI benefits:
- Colorado – Taxes SSDI benefits based on income thresholds.
- Connecticut – SSDI benefits are taxable if your income exceeds $75,000 for individuals or $100,000 for married couples.
- Minnesota – Taxes SSDI benefits if income exceeds $84,490 for individuals or $108,320 for joint filers.
- Montana – Taxes SSDI benefits if income exceeds $25,000 for individuals or $32,000 for joint filers.
- New Mexico – Taxes SSDI benefits if income exceeds $100,000 for individuals or $150,000 for joint filers.
- Rhode Island – SSDI benefits are taxed if income exceeds $104,200 for single filers.
- Utah – Imposes a flat tax of 4.55% on SSDI benefits.
- Vermont – Taxes SSDI benefits if income exceeds $50,000 for individuals or $65,000 for joint filers.
- West Virginia – Currently phasing out the tax on SSDI benefits, but it still applies if you meet certain income thresholds.
If you live in any of these states, your SSDI benefits may be subject to state income tax, and it’s crucial to understand the tax implications based on your income.
Understanding Your State’s Tax Laws
Each state has different rules when it comes to taxing SSDI benefits. Some states fully exempt SSDI benefits from taxation, while others may partially tax them based on income. In states like Colorado and Vermont, your income must exceed certain thresholds before SSDI benefits are taxed. This means that if your combined income stays below those limits, you will not owe state taxes on your SSDI benefits.
For those in states like Utah, which applies a flat tax rate, SSDI benefits are taxed regardless of income. It’s important to check the latest state guidelines and consult with a tax professional if you’re unsure about how your state taxes SSDI benefits.
How to Avoid Surprises at Tax Time
To avoid unexpected taxes on your SSDI benefits, follow these steps:
- Review Your Income: Ensure you understand your total income, including SSDI, pensions, and any other sources. Use tools like the IRS tax calculator to estimate your tax liability.
- Consult a Tax Professional: Tax laws can be complicated, especially with disability benefits. Consulting a tax professional who is familiar with SSDI taxation rules will help you avoid costly mistakes.
- Track Changes in State Laws: Since some states are phasing in or out taxes on SSDI benefits, keep track of any changes in your state’s tax laws. This will help you stay informed about future tax responsibilities.
- File Your Taxes Promptly: Filing your taxes on time can help avoid penalties and ensure that you’re paying the correct amount of taxes. Be sure to include all income sources when preparing your tax returns.
Conclusion
For SSDI beneficiaries, it’s important to understand the tax implications of both federal and state taxes. While federal taxes may apply depending on your combined income, many states also impose taxes on SSDI benefits. If you live in a state that taxes SSDI benefits, you need to be aware of your state’s specific income thresholds to avoid surprises.
